Tax Basis Revocable Trust Chapter 29 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company1 An irrevocable trust structured to achieve a step up in the income tax basis of property owned by either spouse on the death of either spouse Uses a general power of appointment coupled with the marital deduction so that all of the property owned by the spouses passes through the taxable estate of the first spouse to die There is little authority regarding use of this technique to achieve a step up in basis, possible rejection by the IRS What Is A Tax Basis Irrevocable Trust?

Tax Basis Revocable Trust Chapter 29 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company2 Where one or both spouses owns appreciated property Where one spouse owns considerably more appreciated property than the other Where the combined estates of both spouses will be less than the available exemption When Is Use Of A Tax Basis Irrevocable Trust Appropriate?

Tax Basis Revocable Trust Chapter 29 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company3 Create a joint irrevocable trust or separate irrevocable trusts by each spouse Spouse is given a general power of appointment over assets transferred to the trust by the grantor spouse Spouse dies without exercising general power What Are The Requirements?

Tax Basis Revocable Trust Chapter 29 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company4 Assets included in spouse’s estate at death, so tax basis adjusted to FMV on date of death Provisions for surviving spouse should be drafted to qualify for marital deduction (potential QTIP strategy) Note: Techniques does not work if spouse exercises general power, therefore only use in stable marriages What Are The Requirements? (cont’d)

Tax Basis Revocable Trust Chapter 29 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company5 –Husband and wife, living in common law state, create a joint irrevocable trust –Each spouse retains nongeneral power to appoint property contributed by him or her, to avoid gift on transfer to trust –Upon death of either spouse, the deceased spouse may direct payment of any of his or her debts or taxes from assets contributed by the other spouse How It Is Done – An Example

Tax Basis Revocable Trust Chapter 29 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company6 –Husband contributes $500,000 from his separate assets to the trust with an income tax basis of $100,000 –Wife dies more than one year after the transfer –Wife had general power of appointment over the trust therefore Trust property will be included in wife’s taxable estate, and The tax basis will increase to FMV of $500,000 How It Is Done – An Example (cont’d)

Tax Basis Revocable Trust Chapter 29 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company7 –Will the trust property be included in the husband’s estate upon his subsequent death? If assets transferred to husband using marital trust, yes If assets transferred to credit shelter trust, no –To minimize subsequent estate tax exposure ( tax implications) husband may Use a qualified disclaimer, or In the case of a QTIP trust, refrain from making the QTIP election or only making a partial QTIP election when the wife dies How It Is Done – An Example (cont’d)

Tax Basis Revocable Trust Chapter 29 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company8 The tax basis irrevocable trust is often recommended as a way to achieve the same tax basis that would result if the property were community property To the extent the property is community in nature, the tax basis irrevocable trust is not necessary Issues In Community Property States